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CCH® BENEFITS — 12/08/09

from Spencer’s Benefits Reports: Large U.S. employers continue to shift significant health coverage costs to retirees or cease sponsoring retiree health benefit programs altogether, according to Towers Perrin’s 2010 Retiree Health Care Cost Survey. At the same time, the survey also revealed that many employers are missing significant opportunities to deliver retiree benefit value while saving money and improving program effectiveness. For the survey, Towers Perrin obtained responses from 550 of the largest employers covering 10.3 million employees and dependents.

In 2010, surveyed employers’ total health benefit costs for retirees are projected to increase by 6% for pre-65 retirees, the same as the average cost increase anticipated for active employees and 4% for retirees older than 65, Towers Perrin said. Currently, only 45% of survey respondents subsidize retiree health care coverage in some form. That figure reflects a steady decline over the past 20 years, Towers Perrin noted. In addition, many employers have put caps on their premium subsidies and, since plan costs are now well in excess of those caps, many retirees now bear the full brunt of cost inflation.

“For retirees supported by investment returns or living on fixed incomes, 2009 was a time filled with deep concerns,” said Dave Guilmette, managing director of the Towers Perrin health and welfare practice. “In addition to their income concerns, many retirees face a special financial challenge: purchasing health care coverage. As employers pull away from subsidization of retiree health benefits, retirees—especially those who are not yet eligible for Medicare—are facing a significant financial burden.”

In addition, only 22% of companies participating in the Towers Perrin survey offer some sort of subsidized retiree coverage to new hires. Another 23% offer retirees access to a company-sponsored plan, but require participants to pay the full cost (no employer subsidy).

Among surveyed employers, the total annual cost for pre-65 retiree health coverage has increased 6% to $7,596 for a single retiree in 2010, compared to $5,184 for a single active employee. The 2010 cost for family coverage (for the increasing group of retirees that still have dependent children) is $19,596—nearly 31% more than comparable costs for family coverage for active employees.

In plans that still offer an employer subsidy, the subsidy covers less than half of the total cost, on average, and typically does not increase to keep up with inflation, Towers Perrin found. Pre-65 retirees’ share of the annual premium for self-only coverage is $3,984. To cover themselves plus one dependent these retirees pay $7,668, and to cover themselves plus family they pay $10,548. These costs are approximately three times higher than the cost share that their active employee counterparts pay for similar coverage. In addition to higher premium costs, pre-65 retirees are paying more toward their ongoing health care expenses due to cutbacks in benefit designs.

For retirees older than 65, the cost of individual plans will increase an average of 4%, to $3,840, while the cost of plans covering a retiree plus one dependent will increase to $7,848. These cost increases do not take into account the fact that a number of employers have eliminated prescription drug coverage or substantially reduced benefits to contain cost increases. With employer subsidies once again significantly lower than those for active employees, retirees pay more than half of the annual premium cost—resulting in contributions that are, on average, double what these retirees would pay as active employees.

“Today’s focus on cutting costs, and concerns about the outcome of health care reform, are compelling many employers to look at their overall retirement benefit proposition—including retiree medical programs,” said Dave Osterndorf, chief actuary of Towers Perrin’s health and welfare practice. “In fact, many employers have already exited their role as plan sponsor for retiree medical benefits. Only about one in three survey respondents are offering subsidized retiree medical benefits to their current active employees. Among those that currently sponsor programs, 10% are planning to exit, and 20% are seriously considering this option for the future.”

Towers Perrin suggests that “many employers are missing significant opportunities to deliver retiree benefit value while saving money and improving program effectiveness.” For example, employers could offer active employees the opportunity to save for retiree medical expenses through health savings accounts (HSAs) or through retiree medical savings accounts (RMSAs) established with health reimbursement arrangement (HRA) balances. Only 31% of employers surveyed currently offer an HSA and another 21% plan to offer one in 2010, while 9% offer an RMSA. Of course, both of these financial “tools” are tied to high deductible health plans which may lead employees to deplete those accounts before retirement simply to cover unpaid medical expenses.